Minnesota Students Default Less Than US Average on Student Loans

Students at Minnesota colleges and universities are defaulting on their student loans at a markedly lower rate than the national average, according to a study by theU.S. Department of Education.

Thestudy found that 8.8% of students at Minnesota postsecondary schoolswho were scheduled to begin paying their loans in 2013 were in default by the third year of repayment.Minnesota’s default rate was the ninth-lowest in the nation.

The study looked at more than 6,000 postsecondary schools in the nation and 108 in Minnesota, including private, public and proprietary (for-profit) schools. Among the largest in the state by enrollment, default rates were:

(Click here to search the federal database for default statistics by school, city or state.)

Nationwide, public community colleges had an average default rate for 2013 of 18.5%, and proprietary schools were at 15%.For four-year public colleges, the average rate was 7.3%, and for four-year private colleges it was 6.5%.

The default rates for community colleges, vocational schools and for-profit colleges tend to be higher because former students are less likely to have completed their studies or see a boost in earnings, and often can’t keep up with loan payments, according to a report in theBrookings Papers on Economic Activity.

The new report provides a detailed look at default rates, but it may not show a complete picture of the debt burden on students. While the reporttakes a snapshot of borrowerswho are within the first three-year window of their repayment phase, it doesn’t capture thosewho delay repayment until after the three-year measurement window expires.

Chanhassen advisor:Use projected starting income to setlimits on loans

People with college degrees earn more, on average, than those with only a high school diploma. In 2014, the median incomeof young adults with a bachelor’s degree was $49,900, compared with $30,000 for people who completed high school, according to the National Center for Education Statistics.

However, excessive studentloan debt is a major burden for many Americans. It can significantly hamper borrowers’finances by increasing their overall debt burden and cutting into money they could usefor mortgages, retirement and other long-term investments. Total student loan debt was $1.36 trillion as of June, according to the Federal Reserve Board, up from $961 billion in 2011.

We asked Chanhassen, Minnesota-based financial advisor Mark Struthers about how families can integrate student loans into their financial lives.

How can students and families make sure their loans are a good investment in their future?

A good rule of thumb is to borrow at a 1-to-1 ratio to your expected incomeafter school. If you expect to make $35,000 your first year or second year out of college, don’t take on more than $35,000 in debt. This rule doesn’t hold true for some professions, like doctors, who see a substantial jump in salary after residency.

Also take into account the “opportunity cost” of not being able to invest the money that you’re paying interest on, and possibly earning 7% or 8% rather than paying 7% or 8%. And consider the income you might earn by going to work sooner, after a shorter college degree or no degree at all.

It can be extremely negative. The size of the debt is often so large that it becomes the centerpiece of a borrower’s life, especially if the amount is two or three times his or herincome. The debt can limit your personal options — what job you take, where you live, when you buy your first home, even when you get married. If you miss payments because of a bad year or two of work, bad luck or bad decisions, the debt can balloon quickly, making it unmanageable. Throw in a corresponding bad credit score, and things can really spiral out of control.

What should parents and students keep in mind when taking out student loans?

Know your numbers. Know what a typical job in your chosen field pays out of college. Walk through what your life might look like while making the loan payments.

Also, know your options. Federal student loans now come with a lot of flexibility and repayment options. Income-driven repayment combined with the possibility of long-term and public service forgiveness may allow you to take more risks with your career.

Finally, know your total cost. Make sure you know how much you’ll be paying in principal, interest and fees over the entire life of the loan. If you borrow $100,000, you could easily end up paying more than$140,000 over a 10-year repayment period.

What options exist to improve the terms of student loan debt?

For private loans, there are fewer options than for federal loans, but onlinestudent loan refinancing companies are taking a fresh, low-rate approach to lending. They seem to realize that many borrowers offer a lower risk profile than the traditional student loan system acknowledges. Forexample, nurses have an unemployment rate ranging from 0% to 2%. Assuming other financial factors are reasonable, why should they be paying 7% or 8% interest? Where is the risk if they can easily find work?

For federal loans, the options are many. Income-based repayment programshave been rolled out over the past 20 years, making federal loans more flexible and easier to handle.

What should families do if they find they can’t make payments?

For federal loans, contact your loan servicer and look at the income-driven repayment options, as well as deferment or forbearance options. The key is to communicate. Be cautiousabout leaving the federal student loan system for a private-company refinance. Giving up the options and protections of federal loans is often not worth a slightly lower rate.

For private loans, look at one of the new online refinancing companies and then call your lender.

Are income-driven repayment plans a good option? What should borrowers know about that?

Most of the time, they are a good option. Each case is different, and there are always trade-offs, but having the downside protection of anincome-driven repayment planif you lose your job means a lot. There’s generally no penalty for prepayment, so you can pay more if you wish.

Before you decide, learn about those trade-offs, including the higher total cost of the loan if you extend the repayment period to get a lower monthly payment. Know what “capitalization” of interest is (paying interest on interest) and when it could happen. Know how your tax filing could affect payment. And know how high your payment could get if your income increases.

Running through the different scenarios with each type of income-driven plan can help you make an informed decision and help prevent panic if things go south.